Hedge fund investors flex their muscles

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Bernie Madoff, didn’t technically run a hedge fund, but his effects on the industry are still being felt today.

Hedge fund investors learned the hard way that they wanted to invest in hedge funds with a more institutional feel, and pushed successfully over the past few years for reforms to hedge fund redemption policies, transparency, use of outside fund administrators and even lower fee structures.

Neil Chelo, director of research for $1.8 billion fund of hedge funds Benchmark Plus in Tacoma, Washington, is applying the techniques he and Harry Markopolos used to sleuth out Madoff to the industry today — asking portfolio managers to justify their positions on the spot, and reverse engineering a hedge fund’s return expectations to make sure a manager is actually delivering value.

The result is that the world’s biggest hedge funds look much more like mutual funds, which makes big investors like pension funds feel safer about investing in the $1.9 trillion industry.

But it is an ironic twist for the hedge fund industry. Over the past two decades many hedge fund managers left the mutual fund industry to avoid such hefty disclosures and launch a lightly regulated hedge fund. For many of them, the increased transparency requirements of investors and the new round of regulation stemming from recent financial reforms means they have come full circle.